### Abstract

Original language | English |
---|---|

Place of Publication | Tilburg |

Publisher | TILEC |

Number of pages | 49 |

Volume | 2007-014 |

Publication status | Published - 2007 |

### Publication series

Name | TILEC Discussion Paper |
---|---|

Volume | 2007-014 |

### Fingerprint

### Keywords

- competition
- profit elasticity
- measures of competition
- concentration
- price cost margin
- profits

### Cite this

*How (Not) to Measure Competition*. (TILEC Discussion Paper; Vol. 2007-014). Tilburg: TILEC.

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**How (Not) to Measure Competition.** / Boone, J.; van Ours, J.C.; van der Wiel, H.P.

Research output: Working paper › Discussion paper › Other research output

TY - UNPB

T1 - How (Not) to Measure Competition

AU - Boone, J.

AU - van Ours, J.C.

AU - van der Wiel, H.P.

N1 - Pagination: 49

PY - 2007

Y1 - 2007

N2 - We introduce a new measure of competition: the elasticity of a firm’s profits with respect to its cost level. A higher value of this profit elasticity (PE) signals more intense competi- tion. Using firm-level data we compare PE with the most popular competition measures such as the price cost margin (PCM). We show that PE and PCM are highly correlated on average. However, PCM tends to misrepresent the development of competition over time in markets with few firms and high concentration, i.e. in markets with high policy relevance. So, just when it is needed the most PCM fails whereas PE does not. From this we conclude that PE is a more reliable measure of competition.

AB - We introduce a new measure of competition: the elasticity of a firm’s profits with respect to its cost level. A higher value of this profit elasticity (PE) signals more intense competi- tion. Using firm-level data we compare PE with the most popular competition measures such as the price cost margin (PCM). We show that PE and PCM are highly correlated on average. However, PCM tends to misrepresent the development of competition over time in markets with few firms and high concentration, i.e. in markets with high policy relevance. So, just when it is needed the most PCM fails whereas PE does not. From this we conclude that PE is a more reliable measure of competition.

KW - competition

KW - profit elasticity

KW - measures of competition

KW - concentration

KW - price cost margin

KW - profits

M3 - Discussion paper

VL - 2007-014

T3 - TILEC Discussion Paper

BT - How (Not) to Measure Competition

PB - TILEC

CY - Tilburg

ER -